The City of Detroit and the bankruptcy court mediators have a habit of making announcements late on Fridays. Today’s relates to an agreement involving the city’s roughly $164 million in Limited Tax General Obligation (LTGO) bonds and two companies that hold or insure them.
Details about the agreement are absent in the mediators’ statement but are “in the final documentation process.” In the city’s Plan of Adjustment, filed May 5, the city planned to pay 10-13 percent on LTGO claims. The bonds are not guaranteed by any specific city revenue.
The mediators did not release the names of the bondholders or insurers, nor any other terms of the agreement, but did say the parties “either hold or insure a large majority of the LTGO bonds, and will be set forth in an amended version of the City’s Plan of Adjustment.”
The Detroit Free Press reports “the companies are believed to be Black Rock Financial Management and Ambac Assurance, both of which were ordered into mediation talks this week.”
Municipal bond investors have been watching Detroit’s bankruptcy because the city has argued that its general obligation bonds aren’t secured by any collateral. That contradicted long-held assumptions among investors that such bonds had priority over other obligations, such as some government services and employee benefits.
“It’s an enormous negative for general obligation bondholders to receive anything below par,” Matt Fabian, managing director of Municipal Market Advisors, a Concord, Massachusetts, research firm, said yesterday in a phone interview. “It implies more risk for general obligation secured bondholders in Michigan.”
Here is the Mediators’ full statement: